The most important week of the year for the financial markets is upon us. The Federal open market Committee of the US is due to announce its interest rate decision on Wednesday with a 25 basis-point cut being the most likely outcome.
Other data from the US includes Core Personal Consumption Expenditure, Consumer Confidence, the Institute of Supply Management’s Manufacturing Index and both the ADP and BLS non-farm payrolls numbers.
The Bank of Japan and Bank of England will announce their respective interest rates on Tuesday and Thursday. There are inflation gauges from the Eurozone and Australia, manufacturing numbers from China and Canada, GDP estimates from the Eurozone and Canada, and we expect to hear from Central Bankers, Jerome Powell of the Fed and Mark Carney of the Bank of England.
While the plethora of data and central bank guidance might seem meaningful, it’s undeniable that the single most important announcement comes from the FOMC on Wednesday evening as the Fed will almost certainly cut interest rates. To a certain extent, Australia, New Zealand and India have pre-empted the Fed’s cut by relaxing their interest rate policies. All three are suffering from an Asian slowdown, with perhaps Australia and New Zealand feeling the pressure from the unwinding of highly leveraged speculative property booms as well as China demand for their goods.
We are now entering phase two of “making America great again.” Phase one was a tax cut. Phase two is interest rate easing. Phase 3 could quite possibly be a currency war! The US stands at a competitive disadvantage if a strong dollar impedes exports. Across the board, currencies are weak relative to the dollar. Notable examples being Sterling, the Euro, the CNY, INR, AUD and NZD. The White House is exploring options to weaken the dollar. A forthcoming interest rate cut in Europe will not help matters.
A US interest rate cut on Thursday, although probably well priced into markets, may give some impetus to short USD currency trades. Chief amongst these may be currencies that offer a positive carry such as the Indian rupee and Chinese Renminbi, and also currencies considered safe haven such as the Japanese Yen. Gold has maintained levels above 1400oz and with more people jumping on the pro- Gold bandwagon I feel it may oscillate in a 1350oz-1450oz range until the ramifications of a Fed cut work their way through markets.
Unfortunately, the cynic in me believes that US equity valuations are propped by FAANG stocks, stock buybacks, overvalued growth projections for many unprofitable companies and general optimism of speculators who seem to shrug off violent 10% or 20% swings in prices as part of the investing game.
I’m waiting for a correction. And I don’t think it so far away.
Good luck and good trading! Ben Robson
Ben Robson is the CEO of Spectrex Commodities and author of Currency Kings- How Billionaire Traders Made Their Fortune Trading Forex And How You Can Too.
